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Possibly the Last Time to Get Out of the Dollar

March 15, 2011
Dallas, Texas, USA

It’s no secret that the United States government owes a pretty penny to foreigners. Certainly, what America owes to foreigners pales in comparison to what it owes to Ben Bernanke… but still, $4.45 trillion is no small number, even in these crazy times when terms like “kajillion bajillion” are more appropriate to quantify debt and entitlements.

China is the largest foreign buyer of US Treasuries with around $1.15 trillion in holdings… Japan is the second largest at around $886 billion. Curiously, the trend for China has been down– the Middle Kingdom has been steadily reducing its position since peaking in October 2010.

Japan, on the other hand, has been steadily increasing its Treasury holdings over the same period. Its government does have a long pattern of currency intervention, and there has been much grumbling in Tokyo about the effects of the strong yen on their exports.

Fast forward to this past weekend. Earthquake. Tsunami. Volcano. Nuclear radiation. Japan clearly has other things on its mind right now than to continue financing the ongoing largess in Washington DC.

At a minimum, Japan will likely slow (or eliminate) its US Treasury purchases, instead focusing on dumping money into its own economy. At greater risk, Japan may choose to allow much of its Treasury portfolio to simply mature, requiring the US government to repay tens of billions of dollars of principal (which it doesn’t have).

With so much uncertainty, many investors around the world are buying Treasuries at the moment, so if Japan starts selling its portfolio into that momentum, the impact may be negligible… for now. Rearranging the deck chairs, if you will.

Come June 30th, though, with the supposed end of the “I’m not printing money” money printing that is quantitative easing, the US government will have lost, in theory, two of its biggest buyers– the Federal Reserve and Japan. And with both China and the OPEC nations slashing their own Treasury purchases, it leaves one simple question:

Who will buy all of this US government debt?

Below are some of the possible outlets:

1) US commercial banks. They’re awash with cash and partially owned by the government anyhow. The Treasury department could easily influence banks to increase their net bond purchases. This would have the effect of crowding out (once again) small businesses and individuals’ access to credit.

2) Retirement accounts. There’s $5 trillion of fresh meat available in US retirement accounts. It would be nothing for the Congress to pass a law requiring money managers to allocate a portion of their onshore retirement accounts to the ‘safety and security’ of US Treasuries. Kiss your retirement savings’ purchasing power goodbye.

3) Higher taxes. This is a given, unfortunately. It’s erroneous to conclude that higher tax rates yield higher tax revenues– yet this is the standard mantra of politicians. Higher tax rates reduce incentives to invest, take risks, and create wealth. Economic activity falls.

4) Default. Paint China as the root of all evil, the real reason behind America’s financial decline. Find a plausible reason to single out China and default on the debt that they own. I think this is possible down the road, but it would take a few years of preparatory political jockeying to pull off. What’s more likely is….

5) QE3. It’s coming back, like a bad Stallone franchise that just won’t go away. The lender of last resort will once again be the last resort… for the US government.

After a brief period of dollar strength from reduced risk tolerance, investors will realize that the world ex-Japan did not, in fact, come to an end… and they will resume the long-term trend of selling dollars for precious metals and more stable currencies (Australia, Singapore, and possibly even Japan).

The next few months may prove to be the best (and last) time to get out of the dollar.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • wsm

    An interesting post – but it does seem to reek of the crowded consensus. Namely, none of the 5 reasons you list logically leads to the conclusion that you write at the end – “get out of the dollar”.

    Yes, the dollar is likely to lose some influence in the global marketplace in coming years – going from THE reserve currency to A reserve currency. But there is no logical argument that global markets will eschew the dollar altogether.

    By the way, if Japan is “focusing on dumping money into its own economy” it will most likely have to purchase foreign labor, as domestic demographics simply do not support the gargantuan level of recovery labor that will be necessary. Much of this spend will likely be in the form of dollars (since dollars remain the most prevalent global currency at this time).

  • Guest

    So … you suggest cash out of all retirement accounts then?

  • goldbug

    I think this article is ignoring the elephant in the room, so to speak, in focusing on the problems of the dollar. The elephant is, of course, “What’s going to happen to the yen?” Japan is already the worlds most indebted government, and this crisis could cost them trillions!
    The Japanese stock market is already tanking as money is being pulled out of Japan, and why? Because the only way the Japanese government will be able to pay for this is through Yen devaluation. They will print money like there’s no tomorrow. This, being one of the world’s “Big 3″ currencies, you can bet the other 2 currencies, the dollar, and the euro -will follow suit with their own devaluations. They have to, to preserve the balance of trade equilibrium. Plus it gives everyone an excuse to inflate more of their debts away! It will be a further “race to the bottom.” Will China follow suit with it’s own devaluation? They may have to. You have the makings here of a really serious currency war breaking out, with hyperinflation as one of it’s effects. It will be a long time before Japan is a good place to invest, or anywhere else, for that matter. Might I suggest gold?

  • Vincent

    I’m a former government employee with a thrift savings plan (TSP) not yet retirement age. How do I move my money (all in government bonds). To a safer and secure location? Thinking of relocating to Columbia.

    • Michael Mason

      “Thinking of relocating to Columbia”

      Columbia, South Carolina?

      Or Colombia?

      I personally recommend the latter.

      - MPM

      • Vincent

        Medellin, Columbia

      • Kim Sung Ill, the turd

        Dude, or senor, if I may, at least learn the name of the country before you go down there. The reason Michael Mason was confused is that the country is spelled Colombia (2 “o”‘s vs. a “u” in the capital of S. Carolina.

        May I suggest S. Carolina as a destination, since the spelling problems would be already overcome – “Smiling Faces, Beautiful Places (just leave your Yankee ways back in the dump you left, that’s all we ask)” (Yes, that is a long state motto, but we’re not gonna change it based on some damn yankee’s opinion, hear?)

      • John

        Vincent, Medellin, Colombia is a great city. The weather is fabulous, and the drug lords are gone. (Well, maybe not gone – just relocated.) Good luck John R.

    • Cleve

      I think you can convert your TSP to a self-directed IRA. If you can, do it. It gives you a lot more freedom to manage your own retirement account. I used a company called Guidant Financial to help me do it. It was a pain in the butt, but finally got it done. The advantage is you can move everything offshore and your investment options open up considerably: land, real estate, foreign equities, even investing in a business.

      Or, another option: Convert TSP to an IRA and then move it offshore. I did this with Jyske Global Asset Management out of Denmark. The administrator is still in the U.S., but all the funds are managed in Denmark.

  • Tk69

    Get out of the dollar as opposed to what? What currency should we use? China? Russia? Japan? Canada? Swiss franc? etc. Who isn’t debasing their currency? Gold & Silver? People are buying this already, but where is this considered a currency?

    • Anon

      decentralized currency.

      check out bitcoin for one idea

  • terry_freeman

    Faith-based paper currency is on its way out. Central banks, for the first time in a long while, are net buyers of gold. There are people – such as the IMF – who are trying to push for some sort of global paper currency – SDRs or something similar.

    Others are pushing for – at the very least – a convertible gold standard and free banking, unsupported by central banks, bank holidays, and other inducements to moral hazard. I’m hoping this camp wins; they have a better shot at solving the root problems.

  • Bud

    As to the possibility of defaulting on our debt to China- It’s not likely that we would out-and-out default, BUT the threat of doing so is a bargaining chip we should keep on the table. It might make China more, shall we say, “cooperative” in re-structuring when that becomes an issue, and might induce them to be more “reasonable” diplomatically in many situations.

  • D.Ustinas

    tk69, you are calling fiat paper “currency”. It is not, it is a fiat, by definition, and no, there is no such thing as “fiat currency”, it either is a currency or isn’t. There was a term “hard currency”, back when dollar was backed by gold, and so was swiss frank, but those times are long gone. You have no currency in your pocket, wherever you live. What you have in your pocket is a worthless paper that besides being worthless also is a mechanism through which the government can steal even it’s currently inappropriate “value”.

    Gold, on the other hand is money (even though, not in a currency status). Show me a place where your gold is refused. Moreover, if us govt stop existing tomorrow then so will their paper “participation bonus points”. Gold, on other hand again, will continue to be accepted no matter which government stamp it bears.

    Best advice today is:

    1 – ***something I do not dare to say – but you should be able to deduct all by yourself – just think of the complete opposite of certain most repeated obvious advise you hear in every “surviving coming collapse” preparedness spiel! People who actually do what is advised, do not survive in a collapse, unless they were so rich that it wasn’t really a material difference for them.***

    2 – Quietly and completely convert all assets to physical gold in your possession, except small current monthly needs.

    Forget about investing, it is all a lie. It is a trap. Investing is against the law in USA.

    This might sound crazy, but you’d do well if you just trust this. If you can’t just trust it, then you must do a lot of work, research and reading, only to arrive to the same conclusion much, much later, where it could be too late. You may also never happen to have a required intelligence to really get it BEFORE every dog knows it (you never know, don’t be too certain, not intended as an offense).

    Test yourself, can you explain a meaning behind a tax on “gold profits” (like %28 taxes due on selling for $1300 a gold coin that you bought for $600)? If your explanation agrees with an official version in any way, you are deep in the matrix, and your only hope of survival is to heed the advice on how to unplug yourself without really understanding what you are doing and why.

    Best Wishes.

  • Buckdancer

    You could buy shares in Central Fund of Canada, CEF, which buys physical gold and silver to put in their safe. It has kept value with gold over the last 10 years and I doubt US Govt will confiscate stock shares from us. Just sell some of it as you need $ to buy groceries. Also you could buy GG, FCX and SSRI, gold and silver mining stocks.

  • Francis Meyrick

    Right now, if I walk into any of my local super markets or shops, and offer to trade/barter silver coins (including 40% silver and 90% silver) to do my shopping, I’d get a real funny look. I suspect however, that in a few years time, it will be different. That many canny American shop keepers and traders will one day say “Certainly Sir!” and have the knowledge and experience to expertly assess my offerings.
    I prefer silver to gold for the “divisibility” reason. My biggest concern? Sky rocketing crime, as the welfare payouts no longer support the good life, i.e. beer and steak at taxpayers’ expense…

  • John

    One key strategy not described in the article is where/what currency to place/convert your USDs. I am thinking that copper as commodity is one to seriously consider, i.e., rides the commodity price increases, and is need from China and India. As for currency, obviously renminbi (if you can get any), or the Australian dollar. Any thoughts? Thank you, John R.

  • Xbalboakid

    How do we “get out of the dollar” What do we buy with our dollars ?? As you can tell, I’m new at investing but very worried and would like to understand specifically what my options are. VP

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